Stimulus Comparison: Extended Bush Tax Cuts vs. Domenici-Rivlin Plan, 12/08/10

The exact numbers in the compromise extention of the Bush tax cuts are not yet available, but CNNMoney is reporting early Treasury estimates place it at $458 billion over two years. The overall compromise adjustment including the 2% Social Security cut, business tax breaks, and estate tax deductions should total between $700 to $800 billion in tax relief. Deficit hawks are reportedly OK with the implied increase in short-term debt so long as it is tied to a long-term deficit reduction plan.

Is this a plus or a minus for the economy? Previously, I have observed that both sides are Keynesians, now. For Congress, a decision not to extend the Bush tax cuts would come with the political risk of blame for a potential double-dip recession, i.e., extending an existing tax cut is not a true stimulus, but eclipsing the tax cut could hinder economic growth. We need more stimulus because we fear further contraction.

For stimulus size comparison, in 2011, Domenici-Rivlin projected the value of a payroll tax holiday to be $481 billion. The D-R plan would commence in 2012 with a payroll tax holiday stimulus paired with a Deficit Reduction Sales Tax (DRST), a VAT. In 2012, the D-R plan would net around $375 billion stimulus from the payroll tax holiday after the DRST (which would raise $105 billion), but D-R had contemplated that the Bush tax cuts would expire. So, the Bush tax cut compromise, if it comes about, would result in two to three times the first year stimulus of D-R.

Will that be enough stimulus to revive the economy? If throwing money at the economy is enough, then yes. If we need direction in spending that money, which I feel we do (on alternative energy), then we need an industrial policy as described in my last post.